forecasting techniques in production and operations management

BBA- Sem V
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 Forecasting is the process of making predictions of the future
based on past and present data.

 This is most commonly by analysis of trends.- TIME SERIES

ANALYSIS

 A commonplace example might be estimation of some variable of

interest at some specified future date. 
 Prediction is a similar, but more general term.
 Both might refer to formal statistical methods employing time
series, cross-sectional or longitudinal data, or alternatively to less
formal judgmental methods.

 Usage can differ between areas of application: for example,

in hydrology, the terms “forecast” and “forecasting” are sometimes
reserved for estimates of values at certain specific future times,
while the term “prediction” is used for more general estimates,
such as the number of times floods will occur over a long period.
 Risk and uncertainty are central to
forecasting and prediction;
 it is generally considered good practice to

indicate the degree of uncertainty attached to

specific forecasts.
 In any case, the data must be up to date in

order for the forecast to be as accurate as

possible.
 In some cases, the data used to predict the

variable of interest is itself forecasted.[1]

 When the strategy is implemented, the rest of
the company must be poised to deal with the
consequences.
 An important component in this

implementation is the sales forecast, which is

the estimate of how much the company will
actually sell.
 The rest of the company must then be geared

up (or down) to meet that demand. In this

module, we explore forecasting in more
detail, as there are many choices that can be
made in developing a forecast.
 Accuracy is important when it comes to
forecasts.
 If executives overestimate the demand for a
product, the company could end up spending
money on manufacturing, distribution, and
servicing activities it won’t need.
 Data Impact, a software developer, recently
overestimated the demand for one of its new
products. Because the sales of the product
didn’t meet projections, Data Impact lacked the
cash available to pay its vendors, utility
providers, and others. Employees had to be
terminated in many areas of the firm to trim
costs.
 What Is Forecasting in Operations Management?

 Operations management is complex:

 You have to plan, implement, and supervise

the production of goods and services.

 But forecasting can help smooth out the

process by ensuring adequate resources to
meet demand.
 Organizations use forecasting methods
to predict business outcomes.

 Forecasts create estimates that can help

managers develop and implement production
strategies.
 Operations managers are responsible for the

processes that deliver the final product. ...

 These forecasts are used for budgeting,

sales and demand planning.
 The method of forecasting will vary according
to available data and industry size and
respective goals.
 Forecasts are developed using both

qualitative and quantitative data.

 Although they are useful in making educated

predictions, they are not always accurate, so
they should be used with caution.
Forecasts can be used to predict events over different time horizons:

 Short range: These forecasts are usually 3

months into the future. They are most often
used for hiring, scheduling, determining
production levels of planning processes.
 Medium range: This is usually 3 months to a

year into the future. These forecasts are used

for budgeting, sales and demand planning.
 Long range: These forecast 3 years or more into

the future. It's used for capital expenditures,

relocation and expansion, and research and
development.
 Forecasting Horizons

 Long term forecasting tends to be completed at high levels in

the organization. The time frame is generally considered longer
than 2 years into the future. Detailed knowledge about the
products and markets are required due to the high degree of
uncertainty.  This is commonly the case with new products
entering the market, emerging new technologies and opening
new facilities. Often no historical data is available.

 Medium term forecasting tends to be several months up to 2

years into the future and is referred to as intermediate term.
Both quantitative and qualitative forecasting may be used in
this time frame.

 Short term forecasting is daily up to months in the future.

These forecasts are used for operational decision making such
as inventory planning, ordering and scheduling of the
workforce. Usually quantitative methods such as time series
analysis are used in this time frame.
What is the importance of forecasting in operations management?

 Forecasting is valuable to businesses

because it gives the ability to make informed
business decisions and develop data-driven
strategies.

 Financial and operational decisions are made

based on current market conditions and
predictions on how the future looks.
These seven steps can generate forecasts.

 Determine what the forecast is for.

 Select the items for the forecast.
 Select the time horizon.
 Select the forecast model type.
 Gather data to be input into the model.
 Make the forecast.
 Verify and implement the results.
 Types of forecasts

 Economic forecasts: Make predictions related

to inflation, money supplies, and other
economic factors that can affect businesses.
These forecasts often influence medium to
long range planning

 Technological forecasts: Keep track of rate of

technological progress. As technologies
mature and become more applicable to
business use cases, these may require new
facilities equipment and processes. These
forecasts inform long range planning
 Demand forecasts: 
 Estimate consumer demand for a business'

products or services.
 A demand forecast will be used to estimate

production and all relevant inputs.

 These forecasts can inform short, medium,

and long term planning. 

 Also referred to as sales forecasts.
 The Benefits of Forecasting in Planning and
Production
 More effective production scheduling. So

much of contemporary demand planning

strategy can be compared to looking in a
rearview mirror. ...
 Inventory management and reduction. ...
 Cost reduction. ...
 Optimized transport logistics.
What are the methods of forecasting? Y= a+bX
Categories of Forecasting Methods

 Qualitative Forecasting
 Qualitative forecasting techniques are

subjective, based on the opinion and

judgment of consumers and experts; they are
appropriate when past data are not available.
They are usually applied to intermediate- or
long-range decisions.
 In the following, we discuss some examples

of qualitative forecasting techniques:

 Executive Judgement (Top Down)
 Groups of high-level executives will often

assume responsibility for the forecast.

 They will collaborate to examine market data

and look at future trends for the business.

 Often, they will use statistical models as well

as market experts to arrive at a forecast.
 Sales Force Opinions (Bottom up)
 The sales force in a business are those

persons most close to the customers.

 Their opinions are of high value.
 Often the sales force personnel are asked to

give their future projections for their area or

territory.
 Once all of those are reviewed, they may be

combined to form an overall forecast for

district or region.
 Delphi Method

 This method was created by the Rand Corporation in the

1950s.
 A group of experts are recruited to participate in a
forecast.
 The administrator of the forecast will send out a series of
questionnaires and ask for inputs and justifications.
 These responses will be collated and sent out again to
allow respondents to evaluate and adjust their answers.  
 A key aspect of the Delphi method is that the responses
are anonymous, respondents do not have any knowledge
about what information has come from which sources.
 That permits all of the opinions to be given equal
consideration.
 The set of questionnaires will go back and forth multiple
times until a forecast is agreed upon.
 Market Surveys
 Some organizations will employ market

research firms to solicit information from

consumers regarding opinions on products
and future purchasing plans
Quantitative Forecasting

 Quantitative forecasting models are used to forecast future data as a

function of past data. They are appropriate to use when past
numerical data is available and when it is reasonable to assume that
some of the patterns in the data are expected to continue into the
future. These methods are usually applied to short- or intermediate-
range decisions. Some examples of quantitative forecasting methods
are causal (econometric) forecasting methods, last period demand
(naïve), simple and weighted N-Period moving averages and simple
exponential smoothing, which are categorizes as time-series
methods. Quantitative forecasting models are often judged against
each other by comparing their accuracy performance measures. Some
of these measures include Mean Absolute Deviation (MAD), Mean
Squared Error (MSE), and Mean Absolute Percentage Error (MAPE).
 We will elaborate on some of these forecasting methods and the
accuracy measure in the following sections.[3]
 Causal (Econometric) Forecasting Methods (Degree)
 Some forecasting methods try to identify the

underlying factors that might influence the variable

that is being forecast. For example, including
information about climate patterns might improve
the ability of a model to predict umbrella sales.
Forecasting models often take account of regular
seasonal variations. In addition to climate, such
variations can also be due to holidays and customs:
for example, one might predict that sales of college
football apparel will be higher during the football
season than during the off-season.
Demand Patterns

 When we plot our historical product demand, the following patterns can often be
found:
 Trend – A trend is consistent upward or downward movement of the demand. This

may be related to the product’s life cycle.

 Cycle – A cycle is a pattern in the data that tends to last more than one year in

duration. Often, they are related to events such as interest rates, the political
climate, consumer confidence or other market factors.
 Seasonal – Many products have a seasonal pattern, generally predictable changes in

demand that are recurring every year. Fashion products and sporting goods are
heavily influenced by seasonality.
 Irregular variations – Often demand can be influenced by an event or series of

events that are not expected to be repeated in the future. Examples might include
an extreme weather event, a strike at a college campus, or a power outage.
 Random variations – Random variations are the unexplained variations in demand

that remain after all other factors are considered. Often this is referred to as noise.
Time Series Methods

 Time series methods use historical data as the basis of

estimating future outcomes. A time series is a series of data
points indexed (or listed or graphed) in time order. Most
commonly, a time series is a sequence taken at successive
equally spaced points in time. Thus, it is a sequence of discrete-
time data. Examples of time series are heights of ocean tides,
counts of sunspots, and the daily closing value of the Dow Jones
Industrial Average.
 Time series are very frequently plotted via line charts. Time

series are used in statistics, signal processing, pattern

recognition, econometrics, mathematical finance, weather
forecasting, earthquake prediction, electroencephalography,
control engineering, astronomy, communications engineering,
and largely in any domain of applied science and engineering
which involves temporal measurements.[
 Simple Moving Average
In this method, we take the average of the
last “n” periods and use that as the forecast
for the next period. The value of “n” can be
defined by the management in order to
achieve a more accurate forecast. For
example, a manager may decide to use the
demand values from the last four periods
(i.e., n = 4) to calculate the 4-period moving
average forecast for the next period.
 Weighted Moving Average
This method is the same as the simple
moving average with the addition of a weight
for each one of the last “n” periods. In
practice, these weights need to be
determined in a way to produce the most
accurate forecast. Let’s have a look at the
same example, but this time, with weights:
 Seasonal Index
Many organizations produce goods whose
demand is related to the seasons, or changes
in weather throughout the year. In these
cases, a seasonal index may be used to assist
in the calculation of a forecast.
 Forecasting models

 Depending on the data you have available and

time horizon you are using, you will want to
apply different forecasting models. While there
are a lot of models one could use, these fall into
three broad types:
 Judgmental (qualitative): This type of forecast
uses subjective inputs. This includes the 
Delphi method, scenario building, and statistical
surveys which are based on intuition and a
collection of opinions from managers and
experts.
 Time-series (quantitative): Time series forecasts use
historical data to make predictions about the future. Data
corresponds to a specific period, such as monthly inputs
over a span of ten years. These forecasts rely on the
assumption that past patterns will repeat in the future, so
these data inputs are used to create long term forecasts.

 Associative models (quantitative): Associative models use

data corresponding to various underlying factors to
predict the desired variable. These models assume a
relationship between the factors and the variable to
predict more complex patterns. Some methods include 
regression analysis and autoregressive moving averages.
Most used forecasts in operations management

 Scheduling: Staff and inventory scheduling are

critical functions to meet demand. This
process involves organizing, selecting, and
allocating the necessary resources to complete
the desired outputs over a period of time.
 In a service business, for example, a forecast
could be used to ensure you have enough
front office employees to meet fluctuating
demand that often involves attending to
immediate customer service requests.
 Material requirements planning (MRP): This
system is used to calculate the materials
needed to manufacture a final product.
 MRP requires operations managers to take

inventory, determine if any additional

inventory is needed, and scheduling
production.
Reference
 https://www.getapp.com/resources/what-is-
forecasting-in-operations-management/

 https://www.universalclass.com/articles/busi
ness/the-art-and-science-of-forecasting-in-
operations-management.htm
 https://pressbooks.senecacollege.ca/operati
onsmanagement/chapter/forecasting/